Why Private Equity Returns Are Compressing: Lee McCabe on Operational Value Creation

In a recent LinkedIn post, Lee McCabe argues that the primary driver behind compressing private equity (PE) returns is not increased competition, but rather the industry’s persistent inability to materially improve the businesses they acquire. McCabe contends that many firms have become overly reliant on favorable market conditions rather than genuine operational expertise.

The Fading Era of Easy Returns

McCabe highlights that the traditional tailwinds of falling interest rates, expanding multiples, and readily available leverage, which masked underlying operational weaknesses, are no longer sufficient. He cites reports from Bain and McKinsey that indicate a significant shift in the industry. Bain’s 2026 report, as McCabe interprets it, suggests that buyout funds are holding onto assets longer, with record unrealized value and distributions well below historical norms, signaling the end of an easier investment era. McKinsey, in a more diplomatic tone, points to the fading impact of declining rates and abundant leverage, emphasizing that future success hinges on disciplined entry and consistent operational value creation.

As McCabe puts it:

“If rates are falling, debt is cheap, multiples are expanding, and you can exit in a friendly market, you do not need to be a brilliant operator. You just need to avoid doing anything too stupid.”

This, according to McCabe, describes a past environment that is now gone. The current market, he asserts, demands more than just avoiding mistakes; it requires active improvement of portfolio companies.

The Core Problem: Spectator Operations

McCabe identifies the central issue as a widespread failure within the PE industry to master the “boring things” that drive true business improvement. He lists critical areas where many firms fall short, despite often discussing them:

• Pricing strategies
• Sales management
• Systems implementation
• Reporting accuracy
• Talent development
• Procurement efficiency
• Route density optimization
• Customer retention
• Conversion rate improvement

He elaborates on this point:

“All the boring things private equity loves talking about and is still strangely bad at doing.”

This gap between rhetoric and execution, McCabe argues, is why returns are compressing. He contends that firms are mistaking market dynamics for their own operational prowess.

Distinguishing Investors from Operators

McCabe draws a sharp distinction between firms that genuinely create value through operational enhancements and those that merely benefited from favorable market conditions. He notes that many firms spent two decades appearing more capable than they were, largely due to a supportive economic environment.

In McCabe’s view:

“The market is simply exposing who was relying on the market.”

He suggests that firms which merely hired one operating partner and listed them on their website, believing this constituted being “operationally focused,” are now discovering the extent to which leverage was doing the heavy lifting. The current environment, McCabe concludes, is far less forgiving of this approach. He summarizes the situation by stating that while competition is a factor, the more significant issue is that “most PE firms still buy like investors and operate like spectators.” This strategy, he emphasizes, was once survivable but is now much less so.